Market May Lose Linker Love as South Africa Inflation Slows

JOHANESBURG (Capital Markets in Africa) – South African government bonds that offer protection against price increases are outperforming nominal debt so far this year — but that may prove to be a false start.

Demand for inflation-linked bonds increased as inflation in Africa’s most-industrialized economy accelerated in 2018, reaching an 18-month high of 5.2 percent in November. But the rate probably plunged to 4.5 percent in December, data will show Wednesday, according to the median estimate of 19 economists surveyed by Bloomberg.

The country’s central bank has lowered its forecast for average inflation this year to 4.8 percent from a previous estimate of 5.5 percent amid lower oil prices, a stronger rand and subdued food costs. The Reserve Bank also predicts that consumer prices will remain within its target range of between 3 percent and 6 percent until the fourth quarter of 2021.

In a test of demand for index-linked bonds, South Africa is offering 650 million rand ($47 million) of the securities at an auction on Friday. Investors bid for 3.6 times the amount on offer at the previous sale on January 18.

Yields on benchmark bonds due December 2026 were trading at 8.86 percent by 7:07 a.m. in Johannesburg. They have been below 9 percent since Dec. 24.